proposed IRS adjustment on the taxpayer's income tax return.

Transcription

1 TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 1) Corporations are required to file a tax return annually regardless of their taxable income. 2) The tax return filing requirements for individual taxpayers only depend on the taxpayer's filing status. 3) If a taxpayer is due a refund, she does not have to file a tax return. 4) If April 15 th falls on a Saturday, the due date for individual tax returns will be on Monday, April 17 th. 5) If an individual taxpayer is unable to file a tax return by its original due date, the taxpayer can request an automatic 9-month extension to file the return. 6) An extension to file a tax return does not extend the due date for tax payments. 7) The statute of limitations for IRS assessment generally ends four years after the date a tax return is filed. 8) For fraudulent tax returns, the statute of limitations for IRS assessment is ten years. 9) The IRS DIF system checks each tax return for mathematical mistakes and errors. 10) Joel reported a high amount of charitable contributions as a deduction on his individual tax return relative to taxpayers with similar income levels. The information matching program is the IRS program most likely to identify Joel's tax return for audit. 11) Office examinations are the most common type of IRS audit. 12) The three basic types of IRS examinations are computer exams, office exams, and business exams. 13) The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to a proposed IRS adjustment on the taxpayer's income tax return. 1

2 14) The "90-day" letter gives the taxpayer the opportunity to pay a proposed IRS tax adjustment or file a petition in the U.S. District Court to contest the adjustment and hear the case. 15) If a taxpayer has little cash and a very technical tax case that she feels very strongly that the tax rules are "on her side," she should prefer to have her case tried in the U.S. Tax Court. 16) In researching a tax issue, Eric finds that the U.S. Circuit Court of Appeals for the Federal Circuit previously has ruled in favor of his tax position, whereas the 11 th Circuit (Eric's circuit) previously has ruled against his tax position. If Eric is contemplating litigating his tax position with the IRS, he should prefer to have his case first tried by the U.S. Tax Court. 17) If a taxpayer loses a case at the Circuit Court level, he is granted an automatic appeal hearing with the Supreme Court. 18) Secondary authorities are official sources of the tax law with a lesser "weight" than primary authorities. 19) Revenue rulings and revenue procedures are examples of primary authorities. 20) The Internal Revenue Code and tax treaties are examples of statutory authorities. 21) Because the U.S. District Court hears a broader set of cases, decisions by the U.S. District Court may be considered to have more authoritative weight than the U.S. Court of Federal Claims. 22) Temporary Regulations have more authoritative weight than revenue rulings. 23) Proposed and Temporary Regulations have the same authoritative weight. 24) An acquiescence indicates that the IRS lost a court case and that it has decided to follow the court's ruling in the future. 25) The Internal Revenue Code of 1986 is the name of the current income tax code of the United States of America. 2

3 26) As required by the Constitution, all tax bills are supposed to originate in the House of Representatives. 27) The Senate Ways and Means Committee is in charge of drafting tax bills in the U.S. Senate. 28) Closed facts are especially conducive to tax planning. 29) Of the two basic types of tax services, beginning tax researchers often prefer topical tax services. 30) In researching a question of fact, the researcher should focus her efforts on identifying authorities with fact patterns similar to her client's facts. 31) Under the Statement on Standards for Tax Services, a CPA may recommend a tax return position if the position is frivolous and the position is not disclosed on the tax return. 32) In general, a CPA will satisfy his professional responsibilities under the Statement on Standards for Tax Services when recommending a tax return position if he complies with the standards imposed by the applicable tax authority. 33) Under the tax law, taxpayers may be subject to both civil and criminal penalties for underpaying their tax liability (e.g., due to fraud). 34) A taxpayer can avoid an underpayment penalty if there is substantial authority that supports her tax return position. 35) If the IRS assesses additional tax on a tax return upon audit, a taxpayer may be subject to interest and penalties on the underpayment. 3

4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 36) Which of the following is not a factor that determines whether a taxpayer is required to file a tax return? A) Filing status. B) Taxpayer's employment. C) Taxpayer's gross income. D) Taxpayer's age. Answer: B 37) If Paula requests an extension to file her individual tax return, the latest she could file her return without a failure-to-file penalty is: A) August 15 th. B) November 15 th. C) September 15 th. D) October 15 th. Answer: D 38) If Lindley requests an extension to file her individual tax return, the latest she could pay her tax due without penalty is: A) October 15 th. B) November 15 th. C) August 15 th. D) April 15 th. Answer: D 39) Corporations are required to file a tax return only if their taxable income is greater than: A) $1,000. B) $0. C) $600. D) $750. Corporations are always required to file a tax return. Answer: E 40) This year April 15 th falls on a Saturday. Individual tax returns will be due on: A) April 16 th. B) April 15 th. C) April 14 th. D) April 17 th. Answer: D 4

5 41) Dominic earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominic is single, 30 years old, and will have zero tax liability this year, he: A) is not required to file a tax return and should not file a return. B) is required to file a tax return. C) is required to file a tax return but should not file because he owes no tax. D) is not required to file a tax return but should file a return anyway. Answer: D 42) Greg earned $21,500 this year and had $1,500 of federal income taxes withheld from his salary. Assuming that Greg is single, 25 years old, and will have a total tax liability of $1,000 (and thus will receive a $500) refund, he: A) is required to file a tax return but should not file because he owes no tax. B) is not required to file a tax return and should not file a return. C) is not required to file a tax return but should file a return anyway. D) is required to file a tax return. Answer: D 43) Bill filed his 2017 tax return on March 15 th, The statute of limitations for IRS assessment on Bill's 2017 tax return should end: A) March 15 th, B) April 15 th, C) April 15 th, D) March 15 th, Answer: B 44) Henry filed his 2017 tax return on May 15 th, The statute of limitations for IRS assessment on Henry's 2017 tax return should end: A) May 15 th, B) April 15 th, C) April 15 th, D) May 15 th, Answer: D 5

6 45) Allen filed his 2017 tax return on May 15 th, 2018 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2017 tax return should end: A) April 15 th, B) May 15 th, C) April 15 th, D) May 15 th, Answer: E 46) Andy filed a fraudulent 2017 tax return on May 1, The statute of limitations for IRS assessment on Andy's 2017 tax return should end: A) May 1 st, B) April 15 th, C) April 15 th, D) May 1 st, Answer: E 47) Martin has never filed a 2017 tax return despite earning approximately $20,000 providing landscaping work in the community. In what tax year, will the statute of limitations expire for Martin's 2017 tax return? A) B) C) D) Answer: E 48) Which of the following is not a common method that the IRS uses to select returns for audit? A) Document perfection. B) DIF system. C) Tax Select system. D) Information matching. Answer: C 49) Leslie made a mathematical mistake in computing her tax liability. Which audit program will likely catch Leslie's mistake? A) Document perfection. B) DIF System. C) Mathematical correction. D) Information matching. Answer: A 6

7 50) Tyrone claimed a large amount of charitable contributions as a tax deduction relative to taxpayers with similar levels of income. If Tyrone's tax return is chosen for audit because of his large charitable contributions, which audit program likely identified Tyrone's tax return for audit? A) Information matching. B) DIF System. C) Deduction Detective. D) Document perfection. Answer: B 51) Ramon's tax return was randomly selected for audit. Which IRS program likely selected Ramon's return for audit? A) Information matching. B) National Research Program. C) DIF System. D) Document perfection. Answer: B 52) Which of the following audits is the most common and typically less comprehensive? A) Office. B) Random. C) Correspondence. D) Field. Answer: C 53) Which of the following audits is the least common, broadest in scope, and typically most complex? A) Targeted. B) Field. C) Correspondence. D) Office. Answer: B 54) Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the: A) 30-day letter. B) 90-day letter. C) Tax adjustment letter. D) Appeals letter. Answer: A 7

8 55) Basu received a letter from the IRS that gave him the choice of (1) paying a proposed deficiency or (2) filing a petition with the U.S. Tax Court. Basu received the: A) Appeals letter. B) 90-day letter. C) Tax adjustment letter. D) 30-day letter. Answer: B 56) Which of the following courts is the only court that provides for a jury trial? A) U.S. Court of Federal Claims. B) Tax Court. C) U.S. District Court. D) U.S. Circuit Court of Appeals. Answer: C 57) Lavonda discovered that the 5 th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case? A) Tax Court or the U.S. District Court. B) Tax Court or the U.S. Court of Federal Claims. C) U.S. Court of Federal Claims only. D) Tax Court only. E) U.S. District Court only. Answer: A 58) Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case? A) Tax Court only. B) U.S. District Court only. C) U.S. Court of Federal Claims only. D) Tax Court or the U.S. Court of Federal Claims. E) Tax Court or the U.S. District Court. Answer: C 8

9 59) Rowanda could not settle her tax dispute with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the: A) U.S. District Court. B) Tax Court. C) U.S. Circuit Court of Appeals. D) U.S. Court of Federal Claims. Answer: B 60) Which of the following is not considered a primary authority? A) Revenue Ruling. B) Tax service. C) Tax Court case. D) Treasury Regulation. Answer: B 61) Which of the following is not considered a secondary authority? A) Text book. B) Tax article. C) Tax service. D) Private Letter Ruling. Answer: D 62) Which of the following has the highest authoritative weight? A) Private letter ruling. B) Text book. C) Revenue ruling. D) Tax service. E) Tax article. Answer: C 63) Which of the following has the highest authoritative weight? A) Revenue procedure. B) Private letter ruling. C) Revenue ruling. D) Action on decision. E) Legislative regulation. Answer: E 9

10 64) Josephine is considering taking a 6-month rotation in Paris for her job. Which type of authority may be especially helpful in determining the tax consequences of Josephine's job in Paris? A) Revenue procedure. B) Determination letter. C) Regulation. D) Tax treaty. E) Private letter ruling. Answer: D 65) Generally, code sections are arranged (grouped together): A) randomly. B) by topic. C) chronologically. D) by length. Answer: B 66) Which of the following has the lowest authoritative weight? A) Interpretative regulation. B) Legislative regulation. C) Private letter ruling. D) Revenue ruling. E) Revenue procedure. Answer: C 67) Which judicial doctrine means that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction? A) Stare decisis. B) The Goldman rule. C) Judicial hierarchy. D) Judicial consistency. Answer: A 68) The regulation with the lowest authoritative weight is the: A) Procedural regulation. B) Interpretative regulation. C) Legislative regulation. D) Proposed regulation. Answer: D 10

11 69) Princess, who resides in the 2 nd Circuit, recently found a circuit court case that is favorable to her income tax research question. Which of the following circuits would she prefer to have issued the opinion? A) 2 nd Circuit. B) 1 st Circuit. C) Federal Circuit. D) 2 nd Circuit or the Federal Circuit. Answer: D 70) Jaime recently found a "favorable" trial level court opinion directly on point for her tax question. Which trial level court would she prefer to have issued the opinion? A) Circuit Court. B) Tax Court. C) Divorce Court. D) District Court. Answer: B 71) Which of the following committees typically initiates tax legislation? A) Senate Tax Committee. B) Joint Conference Committee. C) Senate Finance Committee. D) House Ways and Means Committee. Answer: D 72) Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section? A) IRS revenue rulings. B) IRS regulations. C) U.S. Tax Court cases. D) Committee reports. Answer: D 73) If the President vetoes tax legislation, Congress: A) can override the President's veto with a 75 percent positive vote in the House and Senate. B) can override the President's veto with a 2/3 rd positive vote in the House and Senate. C) can override the President's veto with a 50 percent positive vote in the House and Senate. D) cannot override the President's veto. Answer: B 11

12 74) Jeremy has a new client. He has identified a research question that relates to a transaction that the client completed several months ago. This type of research question will primarily involve: A) closed facts. B) open facts. C) new facts. D) old facts. Answer: A 75) In a planning context, A) new facts are preferred to old facts. B) old facts are preferred to new facts. C) open facts are preferred to closed facts. D) closed facts are preferred to open facts. Answer: C 76) Which of the following types of tax services are arranged by code section? A) professional tax service. B) legal tax service. C) topical tax service. D) annotated tax service. Answer: D 77) Which of the following is not a common tool used in conducting tax research? A) Citator. B) Topical tax service. C) Keyword search. D) Annotated tax service. Answer: E 78) Which of the following is not a source of a tax practitioner's professional responsibilities? A) Circular 230. B) State Board of Accountancy statutes. C) Statements on Standards for Tax Services. D) AICPA Code of Professional Conduct. Answer: E 12

13 79) According to Statement on Standards for Tax Services No. 1, a tax practitioner can recommend a tax return position: A) only if the position meets the "clear and convincing evidence" standard. B) if the position complies with the standards imposed by the applicable tax authority. C) if the position is frivolous and disclosed on the tax return. D) only if the position meets the "more likely than not" standard. Answer: B 80) Circular 230 was issued by: A) State Boards of Accountancy. B) IRS. C) American Bar Association. D) AICPA. Answer: B 81) Which of the following is a false statement? A taxpayer filing a fraudulent tax return: A) is potentially subject to criminal penalties. B) is potentially subject to fines and a prison sentence. C) is potentially subject to civil penalties. D) will have an unlimited statute of limitations for the fraudulent tax return. Answer: E 82) For which of the following tax violations is a civil penalty not imposed on taxpayers? A) Fraud. B) Failure to pay tax owed. C) Failure to make estimated tax payments. D) Failure to file a tax return. Answer: E 83) A taxpayer can avoid a substantial understatement of tax penalty: A) if the position has a reasonable basis and is not disclosed on the tax return. B) if the position is frivolous and disclosed on the tax return. C) if there is substantial authority to support the position. D) if the position has a realistic possibility of being sustained by the IRS or courts. Answer: C 13

14 84) A taxpayer can avoid a substantial understatement of tax penalty: A) if the position has a reasonable basis and is disclosed on the tax return. B) if the position is not frivolous and disclosed on the tax return. C) if the position has a realistic possibility of being sustained by the IRS or courts. D) if the position is frivolous and disclosed on the tax return. Answer: A 85) Which types of penalties are only imposed after normal due process including a trial? A) Civil penalties. B) Tax return. C) Criminal and civil penalties. D) Criminal penalties. Answer: D 86) A tax practitioner can avoid IRS penalty relating to a tax return position: A) if the position has a realistic possibility of being sustained by the IRS or courts. B) if the position has a reasonable basis and is not disclosed on the tax return. C) if the position is frivolous and disclosed on the tax return. D) if there is substantial authority to support the position. Answer: D 87) A tax practitioner can avoid IRS penalty relating to a tax return position: A) only if the position has a more likely than not chance of being sustained by the IRS or courts. B) if the position has a realistic possibility of being sustained by the IRS or courts. C) if the position has a reasonable basis and is disclosed on the tax return. D) if there is not substantial authority to support the position. Answer: C 14

15 ESSAY. Write your answer in the space provided or on a separate sheet of paper. 88) Tina has a very complex tax return and it looks like she will not be able to file her tax return by its due date. When is her tax return due? What are Tina's options for paying her tax due and filing her tax return this year? What are the consequences if Tina does not file or pay her tax timely? Be specific. Answer: Tina's tax return is due April 15 th. Tina may request an automatic 6-month extension to file her tax return (i.e., until October 15 th ). Extensions allow the taxpayer to delay filing a tax return but do not extend the due date for tax payments. If a taxpayer fails to pay the entire balance of tax owed by the original due date of the tax return, the IRS charges the taxpayer interest on the underpayment from the due date of the return until the taxpayer pays the tax. The interest rate charged depends on taxpayer type (e.g., individual vs. corporation) and varies quarterly with the federal short-term interest rate. The interest rate for tax underpayments for individuals equals the federal short-term rate plus three percentage points. Penalties are also imposed when a taxpayer fails to file a tax return. Also, there is no statute of limitations if Tina fails to file her return. 89) For the following taxpayers indicate whether the taxpayer should file a tax return and why. a. Robert earned $50,000 this year as a staff accountant. His estimated tax liability is $4,500, and he e receive a $500 tax refund. b. Amy earned $4,000 this year working part-time. She will have no federal tax liability and has not m federal tax payments. c. Ty earned $2,500 this summer and had $200 of federal taxes withheld from his paycheck. He will h federal tax liability this year. d. Startup Corporation had a $50,000 loss this year. e. The Walker Family Trust earned $500 of gross income this year. Answer: (a) Because his gross income exceeds the applicable gross income threshold, Robert is required to file a tax return. (b) Amy is not required to file a tax return because her income is below the applicable gross income threshold. (c) Ty is not required to file a tax return because his gross income is below the applicable gross income threshold. However, he should file a tax return to receive a refund of the $200 of taxes withheld. (d) Startup Corporation is required to file a tax return as all corporations are required to file an annual tax return regardless of their profitability. (e) Because the trust's income is below the applicable threshold, the Walker Family Trust is not required to file a tax return this year. 15

16 90) For the 2017 tax returns, indicate when the statute of limitation expires and why. a. Phoenix filed his tax return on February 28, b. Jill and Randy filed their tax return on August 16, c. Although required to file, Catherine chose not to file a tax return this year because she was expecti refund and could not pull together all the information needed to file the return. d. Jerry filed his tax return on May 22, 2018 but has accidentally underreported his taxable income by Answer: (a) April 15, The statute of limitations expires three years from the later of the original due date of the return or the date the return was filed. (b) August 16, The statute of limitations expires three years from the later of the original due date of the return or the date the return was filed. (c) Because Catherine failed to file a tax return, the statute of limitation will not lapse for her 2017 tax return. (d) May 22, Because Jerry underreported his gross income by 30%, the statute of limitations is extended to six years. 91) For the 2017 tax returns, indicate when the statute of limitation expires and why. a. Simon filed his tax return on April 10, b. Billy and Barbara filed their tax returns late on December 1, c. Pearson earns a living through various illegal activities. He filed his tax return on March 14, 2018 b report his illegal income on his tax return. d. Luther filed his tax return on July 17, 2018 but has accidentally underreported his taxable gross inc 20%. Answer: (a) April 15, The statute of limitations expires three years from the later of the original due date of the return or the date the return was filed. (b) December 1, The statute of limitations expires three years from the later of the original due date of the return or the date the return was filed. (c) Because Pearson filed a fraudulent tax return, the statute of limitation will not lapse for his 2017 tax return. (d) July 17, Because Luther accidentally underreported his income by only 20%, the statute of limitations will expire three years from the date the return is filed (i.e., the statute of limitation is not extended to six years). 92) For the following tax returns, identify the method the IRS likely used to select the return for audit. a. Dan made a mistake in adding his income on his tax return. b. Juanita failed to report her salary from her 2 nd job on her tax return. c. Michael and Venita deducted a relatively large amount of travel expenses on their tax return for the business. The travel expense is large relative to other taxpayers in similar businesses with similar lev income. d. Paul and Melissa recently went through a very nasty divorce. One of the issues was Paul's less than forthright accounting of his income in determining the appropriate level of alimony. Answer: (a) Document perfection (b) Information matching (c) DIF system (d) Spousal tip. 16

17 93) For the following tax returns, identify which of the three audit types will most likely be utilized. a. The IRS selected Don's return for audit because of his high itemized deductions. The IRS would lik documentation of these deductions. b. Large Public Corporation is a very large publicly traded corporation. It is involved in many comple transactions that have significant tax ramifications. c. George and Barbara operate a small business out of their home. The IRS has identified a couple of that may relate to their business. d. The IRS selected Bill and Hillary's tax return for review because of some of their investment sales. would like a better understanding of the transactions and parties involved. Answer: (a) Correspondence exam (b) Field exam (c) Office exam (d) Correspondence exam and possibly an office exam. 94) The IRS has recently completed its audit of Lorene's corporation. As a tax novice, she has very little understanding regarding the audit process and what happens next. Describe the post-audit process for Lorene and identify her options. Answer: After the examination, the IRS agent provides a list of proposed adjustments (if any) to the taxpayer for review. If the taxpayer agrees to the proposed changes, the taxpayer signs an agreement form (Form 870) and pays the additional tax owed (or receives the proposed refund). If the taxpayer disputes the proposed changes, the taxpayer will receive a "30-day letter" which instructs the taxpayer that he or she has 30 days to either (1) request a conference with an Appeals Officer, who is independent and resides in a separate IRS division from the examining agent or (2) agree to the proposed adjustment. An appeals officer would consider the merits of the unresolved issues as well as the "hazards of litigation" - that is, the probability that the IRS will lose if the case is brought to court and the resulting costs of a taxpayer-favorable ruling. If the taxpayer chooses the appeals conference and reaches an agreement with the IRS there, the taxpayer can then sign the Form 870. If the taxpayer and IRS still do not agree on the proposed adjustment at the appeals conference, or the taxpayer chooses not to request an appeals conference, the IRS will then send the taxpayer a "90-day letter." The 90-day letter (also known as a statutory notice of deficiency) explains that the taxpayer has 90 days to either (1) pay the proposed deficiency or (2) file a petition in the U.S. Tax Court to hear the case. If the taxpayer would like to litigate the case but would prefer that the case be heard in the local U.S. District Court or the U.S. Court of Federal Claims, the taxpayer must pay the tax deficiency first and then sue the IRS for refund in the court. 17

18 95) Mel recently received a 30-day letter from the IRS. Although his tax return being audited has several large issues (potential tax consequences of $70,000 $80,000), the IRS agent auditing his return only identified one item that will require a modest adjustment of $10,000. Mel feels strongly that the $10,000 adjustm would not hold up in court and was surprised that the IRS agent did not identify some of the other potential larger issues. What are Mel's choices with respect to the 30-day letter and what factors should influence his decisions? Answer: The "30-day letter" instructs the taxpayer that he or she has 30 days to either (1) request a conference with an Appeals Officer, who is independent and resides in a separate IRS division from the examining agent or (2) agree to the proposed adjustment. An appeals officer would consider the merits of the unresolved issues as well as the "hazards of litigation" - that is, the probability that the IRS will lose if the case is brought to court and the resulting costs of a taxpayer-favorable ruling. Thus, the appeals officer has a bit more latitude to settle cases than examining agents. Because the appeals division is independent, it may be possible for the taxpayer to receive a more favorable resolution as the appeals officer is less emotionally invested in the audit. On the downside, the appeals officer may raise new issues, and thus, increase the taxpayer's tax exposure. In addition, the longer the dispute continues without resolution, the more interest will accrue on the assessment. In Mel's case, the potential risk of the appeals officer raising additional questions probably outweighs the potential benefits of appeal. Thus, it may be better for him to forego the appeals conference and either agree to the proposed adjustment or litigate the case. 96) Kim has decided to litigate a tax issue with the IRS. Describe the trial level courts that Kim may use to litigate the case. Answer: There are three trial level courts that hear federal tax cases; The U.S. Tax Court, The U.S. District Court, and the U.S. Court of Federal Claims. The U.S. District Court is the only court that provides for a jury trial; the U.S. Tax Court is the only court that allows tax cases to be heard before the taxpayer pays the disputed liability and the only court with a small claims division (hearing claims involving disputed liabilities of $50,000 or less); the U.S. Tax Court judges are tax experts, whereas the U.S. District Court and U.S. Court of Federal Claims judges are generalists. Both the U.S. Tax Court and local U.S. District Court cases appeal to the specific Circuit Court based on the taxpayer's residence. In contrast, all U.S. Court of Federal Claims cases appeal to the U.S. Circuit Court of Appeals for the Federal Circuit. 18

19 97) For the following taxpayers, please recommend the most advantageous trial level court(s) to litigate a issue with the IRS. a. Joe is litigating a tax issue with the IRS that is considered a question of fact (i.e., the answers depe facts of the case). There is not a lot of authority on point for this case but Joe has a very appealing sto justify his position that is likely to be viewed sympathetically by his peers. b. The Circuit Court of Appeals for the Federal Circuit recently issued an opinion that is very favorab issue that Jesse plans to litigate with the IRS. c. The Circuit Court of Appeals for the Federal Circuit recently issued an opinion that is not favorable issue that Hank plans to litigate with the IRS. d. The 7 th Circuit (where Elizabeth resides) recently issued an opinion that is very favorable to the issue that Elizabeth plans to litigate with the IRS. Answer: (a) U.S. District Court because it is the only court that offers a jury trial. (b) The U.S. Court of Federal Claims because its appellate court is the Circuit Court of Appeals for the Federal Circuit. (c) The U.S. Tax Court or the U.S. District Court because they will not appeal to the Circuit Court of Appeals for the Federal Circuit. (d) The U.S. Tax Court or the U.S. District Court because they will appeal to the 7 th Circuit. 19

20 98) A client has recently learned of a proposed tax bill that would increase the tax rates on investment gains by 5 percent. The President does not support this increase. Please describe for your client the process by which new tax legislation is created and how the President's disapproval may influence the enactment of the bill. Answer: As required by the U.S. Constitution (Article 1, Section 7), "All bills for raising revenue shall originate in the House of Representatives." The Senate may propose tax legislation, but the first to formally consider a bill will be the House, typically within its Ways and Means Committee. After the committee debates the proposed legislation and drafts a bill, the bill is sent to the House of Representatives for debate and ultimately a vote (either yea or nay without modification). If the bill is approved, it becomes an "Act" and is sent to the Senate, which refers the Act to the Senate Finance Committee. Not to be outdone by the House, the Senate Finance Committee typically amends the Act during its deliberations. After the revised Act passes the Senate Finance Committee, the Act is sent to the Senate for debate and vote. Unlike the process in the House of Representatives, Senators may modify the proposed legislation during their debate. If the Senate passes the Act, both the House and Senate versions of the legislation are sent to the Joint Conference Committee, which consists of members of the House Ways and Means Committee and the Senate Finance Committee. During the Joint Conference Committee deliberations, committee members debate the two versions of the proposed legislation. Possible outcomes for any specific provision in the proposed legislation include adoption of the Senate version, House version, or some compromise version of the two acts. Likewise, it is possible that the Joint Conference Committee will simply choose to eliminate specific provisions from the proposed legislation or fail to reach a compromise on the proposed legislation, thereby terminating the legislation. After the Joint Conference Committee approves the Act, the revised legislation is sent to the House and Senate for vote. If approved by both the House and Senate, the Act is sent to the President for his or her signature. If the President signs the act, it becomes law and is incorporated into the Internal Revenue Code of 1986 (i.e., Title 26 of the United States Code, which contains all codified laws of the U.S.). If the President vetoes the legislation, Congress may override the veto with a 2/3 rd positive vote in both the House of Representatives and Senate. Given the President's disapproval of the proposed tax increase and supermajority required to override a Presidential veto, the legislation most likely will not be enacted. 20

21 99) Chris and Chuck were recently debating whether the Internal Revenue Code is "logical." Chris offers that she has briefly reviewed the Code and could hardly understand its organizational structure, if there is one. Please describe the basic organization of the code and how understanding its organization may be especially beneficial to the tax researcher. Answer: The Internal Revenue Code is segregated into subtitles, chapters, subchapters, parts, subparts, and sections. All existing and any new tax laws are placed in the Code within a specific subtitle, chapter, subchapter, part, subpart, and section of the Code. When referencing a tax law, the researcher generally refers to the law simply by its code section. Code sections are numbered from 1 to 9834, with gaps in the section numbers to allow new code sections to be ad the appropriate parts of the Code as needed. Each code section is further segregated into subsec paragraphs, subparagraphs, and clauses to allow more specific reference or citation. One must understand the organization of a code section (i.e., into subsections, paragraphs, subparagraphs, and clauses) to be able to cite the respective law correctly (e.g., IRC Sec. 162(b)(2)). Many provisions in the Code apply only to specific parts of the Code. If one does not understand what laws are encompassed in the chapter, it would be very difficult to interpret the code section and determine its applicability to a research question. Finally, the Code has been arranged such that, in general, similar code sections are grouped together. Understanding this organization allows the researcher to be much more efficient in locating relevant code sections. 21

22 100) Carey was researching a tax issue and located what appears to be a favorable IRS regulation. He knows that regulations serve different purposes and are issued in different forms. Which purpose and which form of regulation would provide Carey the most confidence that he has found an authority that carries a lot of weight for the long term? How could Carey check the status of this regulation? Answer: Regulations are the Treasury Department's official interpretation of the Internal Revenue Code and have the highest authoritative weight. Regulations are issued in three different forms: proposed, temporary, and final. Final regulations are regulations that have been issued in final form, and thus, until revoked, they represent the Treasury's interpretation of the Code. Temporary regulations, as the name suggests, have a limited life (three years for regulations issued after November 20, 1988). Nonetheless, during their "life," they carry the same authoritative weight as final regulations. Finally, proposed regulations are, as the name suggests, "proposed," and thus do not carry the same authoritative weight as temporary or final regulations. In addition to being issued in three different forms, regulations also serve three basic purposes: interpretative, procedural, and legislative. Most regulations are issued as interpretative or procedural regulations. As the names suggest, interpretative regulations represent the Treasury's interpretation of the Code. Procedural Regulations explain Treasury Department procedures as they relate to administering the Code. Legislative regulations, the rarest type, are issued when Congress specifically directs the Treasury Department to create regulations to address an issue in an area of law. In these instances, the Treasury is actually writing the law instead of interpreting the Code. Because Legislative Regulations actually represent tax law instead of an interpretation of tax law, Legislative Regulations generally have been viewed to have more authoritative weight than Interpretative and Procedural Regulations. However, in Mayo Foundation for Medical Education & Research v. U.S., 131 S.Ct. 704 (2011), the Supreme Court held (subject to specific conditions) that all Treasury regu warrant deference. Checking the status of regulations is a bit complicated. Most tax services alert researchers if a regulation has not been updated for certain changes in the Code. If this is the case, the researche evaluate whether the changes in the Code make the regulation obsolete. 101) Campbell was researching a tax issue and found a favorable Tax Court opinion and an IRC Code Section that appears to answer the question. Is she finished with the research process? If so, why? If not, what must she do? Answer: Campbell is not finished. Once the tax researcher has identified relevant authorities, she must make sure that the authorities are still valid and up to date. For court cases, a citator can be used to review the history of the case to find out, for example, whether it was subsequently appealed and overturned or and to identify subsequent cases that cite the case. Favorable citations strengthen a case, while unfavorable citations weaken the case. Citators can also be used to check the status of revenue rulings, revenue procedures, and other IRS pronouncements. Checking the status of the code is fairly simple: just locate the current version. 22

23 102) Roddy was researching an issue and found a favorable Tax Court decision that addresses his issue. He also determined that there was a nonacquiescence for the case. Who issued the nonacquiescence? What is it? What does it mean and how would it affect Roddy's reliance on the court case? Answer: Except for Supreme Court cases, whenever the IRS loses, it may issue an acquiescence or nonacquiescence as guidance for how the IRS intends to respond to the loss. An acquiescence indicates that the IRS has decided to "follow" the court's adverse ruling in the future - i.e., the IRS will no longer litigate this issue. A nonacquiescence has the exact opposite implications. A nonacquiescence alerts taxpayers that the IRS plans to continue to litigate this issue. Roddy can still rely on the favorable Tax Court case but should alert his client that the IRS has stated very clearly that it does not agree with the Tax Court opinion and will continue to litigate this issue. 103) Raul was researching an issue and found two Tax Court decisions issued within 6 months of each other, one for a taxpayer residing in California and the other for a taxpayer residing in New York whose rulings were inconsistent. Raul knows that the federal tax law does not differ by state and the issue was exactly the same in both cases. Raul is confused because he thought that a basic judicial doctrine was that a court is supposed to rule consistently. Name and describe this judicial doctrine that requires judicial consistency and discuss why the Tax Court may have intentionally ruled inconsistently in this example. Answer: In rendering court decisions, all courts apply the judicial doctrine of stare decisis. This doctrine means that a court will rule consistently with (a) its previous rulings (i.e., unless, due to evolving interpretations of the tax law over time, they decide to overturn an earlier decision) and (b) the rulings of higher courts with appellate jurisdiction (i.e., the courts their cases are appealed to). The implication of stare decisis is that a Circuit Court will abide by Supreme Court rulings and its own rulings, whereas a trial level court will abide by Supreme Court rulings, its respective Circuit Court's rulings, and its own rulings. For example, a district court in California would follow 9 th Circuit and Supreme Court rulings as well as the court's ow rulings. The doctrine of stare decisis presents a special problem for the Tax Court because it appeals to different Circuits based on the taxpayer's residence. To implement the doctrine of stare decisis, the Tax Court applies the Golsen rule. The Golsen rule simply states that the Tax Court will abide by the Circuit Court's rulings that has appellate jurisdiction for a case. The implication of the Golsen rule is that the Tax Court may issue conflicting opinions in different Circuits and thus, most likely explains the differing Tax Court decisions that Raul located. 23

24 104) Rebecca is at a loss. A new tax law was recently passed, and she needs to get a better understanding of why the tax law was passed and the intent of the law from an official authority. Describe what authorities may be especially helpful to Rebecca and why she can't find many authorities that discuss the new law. Answer: The House Ways and Means Committee, Senate Finance Committee, and Joint Conference Committee each produce a committee report that explains the current tax law, proposed change in the law, and justification for the change. These committee reports are considered "statutory" sources of the tax law and may be very useful in interpreting tax law changes and understanding Congressional intent. This is especially important after new legislation has been enacted because, with the exception of the Code, there will be very little authority interpreting the new law (i.e., no judicial or administrative authorities because of the time it takes for the new law to be litigated or for the IRS to issue interpretative guidance - e.g., regulations, etc.). 105) Lakeisha, a 1 st year staff accountant, was researching a tax issue and found what appears to be the answer to her question in her introductory tax textbook that she bought three years ago. She is thrilled because she thought it would take much longer to find her answer. What type of authority is the textbook? What are other examples of this type of authorities? Can Lakeisha base her research conclusion on the textbook or similar authorities? Any suggestions for Lakeisha? Answer: There are two broad categories of tax authorities: primary authorities and secondary authorities. Primary authorities are "official" sources of the tax law generated by the legislative branch (i.e., statutory authority issued by Congress), judicial branch (i.e., rulings by the U.S. District Court, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, or U.S. Supreme Court), or executive/administrative branch (i.e., IRS pronouncements). Secondary authorities are "unofficial" tax authorities that interpret and explain the primary authorities, such as tax research services, tax articles, newsletters, and textbooks. Secondary authorities may be very helpful in understanding a tax issue, but they hold little weight in a tax dispute (hence, the term "unofficial" tax authorities). Thus, tax advisors should always be careful to verify their understanding of tax law by examining primary authorities directly and never cite a secondary authority in a research memo. In Lakeisha's case, this is particularly important because her textbook is three years old. Thus, not only is the textbook not an "official" tax authority, it may also be out of date. 24

25 106) Kodak is a beginning tax researcher. He knows that the 1 st step of the research process is to get an understanding of the facts surrounding the transaction being researched. Describe the two basic types of facts, the sources of facts for a research project, and any advice that may help Kodak. Answer: There are two basic types of facts: open facts and closed facts. Open facts have not yet occurred, such as the facts associated with a proposed transaction. Closed facts have already occurred. The distinction between open and closed facts is important because unlike closed facts, open facts can be altered, and different facts may result in very different tax consequence Open facts allow the taxpayer to arrange a transaction to achieve the most advantageous outcom Thus, they are especially important in tax planning. There are several sources of facts for the typical research projects. Common sources include interviewing clients, speaking with third parties (e.g., attorneys, brokers), and reviewing client documents (contracts, prior tax returns, wills, trust documents, deeds, corporate minutes, etc.). When interviewing clients, you must remember that many clients are not tax experts. Thus, it is up to the tax researcher to ask the correct initial and follow-up questions to obtain all the relevant facts. Within a tax planning context, one should also consider non-tax factors, such as a client's personal values or objectives, as these often put constraints on tax planning strategies. 107) Caitlin is a tax manager for an accounting firm, and Duff is a first year staff accountant. Describe the differences in the manner in which Caitlin and Duff may identify research issues and in general how one may identify research questions. Answer: A tax researcher's ability to identify issues is largely a function of his or her type of tax expertise. A tax expert in a particular area will typically be able to identify quickly the specific tax issues that relate to transactions in that area. For example, an expert in corporate acquisitions would quickly identify the tax consequences and specific issues of alternative acquisition types. A novice, on the other hand, would likely identify broader issues first and the specific issues as he researched the relevant tax law. The best method to identify tax issues is to first get a good understanding of the client's facts. T combine your understanding of the facts with your knowledge of the tax law. For an expert in th particular area, the issues will be immediately evident. For a novice, the initial response to a set of facts may take the form of a series of general questions: (1) Is this item of expense deductible? (2) Is that item of income taxable? (3) In what year should the expense be deducted? (4) In what year should the item of income be taxed? etc. After you identify these types of general issues, your research will enable you to identify the more specific issues that ultimately determine the tax ramifications of the transaction being researched. 25

26 108) Lindy, a tax intern, is beginning her first tax research case for her employer. Her manager has given her a basic understanding of the facts and has identified the basic research question. Lindy is now ready to begin searching for relevant tax authorities. Describe the different types of research tools available to help a tax researcher locate relevant authority and identify which type may be especially useful for Lindy. Answer: Tax services aid the researcher in identifying relevant authorities. There are two basic types of tax services: Annotated tax services and topical tax services. Annotated tax services are arranged by code section - i.e., for each code section, an annotated service includes the code section, a listing of the code section history, copies of congressional committee reports that explain changes to the code section, a copy of all the regulations issued for the specific code section, the service's "unofficial" explanation of the code section, and brief summaries (called annotations) of relevant court cases, revenue rulings, revenue procedures, letter rulings, etc. that address issues specific to the code section. Two examples of annotated tax services are Commerce Clearing House's (CCH) Standard Federal Tax Reporter and RIA's United States Ta Reporter. Topical tax services are arranged by topic (e.g., taxable forms of income, tax-exempt income, tr business expenses, etc.). For each topic, the services identify tax issues that relate to each topic then explain and cite authorities relevant to the issue (code sections, regulations, court cases, revenue rulings, etc.). Beginning tax researchers (like Lindy) often prefer topical services, as they generally are easier to read. Some examples of topical federal tax services include BNA's Tax Management Portfolios, CCH's Tax Research Consultant, and RIA's Federal Tax Coordinator. 109) Hong, an introductory tax student, is beginning his first research project. He has a complete understanding of the relevant facts for his project and has identified the initial research questions. He is now ready to begin using a tax service to identify relevant authorities. What are some suggestions for him on how to use tax services to identify relevant authorities? Answer: A novice may conduct a keyword search in the service, use the tax service's topical index, or "browse" the tax service to identify the relevant portions. Some suggestions for identifying keywords: Try to describe the transaction in three to five words. An ideal keyword search typically includes (1) the relevant area of law and (2) a fact or two that describes the transaction Try to avoid keywords that are too broad (e.g., income, deduction, taxable, etc.) or that may be narrow. If keyword searching is not proving beneficial, check your spelling, make sure you are searchin correct database, rethink your keywords, use another research method, use another tax service, a last resort, take a break. While utilizing keyword searches or other research methods to identify potentially relevant area and tax authorities, you must constantly ask yourself whether you are indeed in the correct area Once the answer to this question is an authoritative "yes," you can delve deeper into the area of related authorities to answer the question. 26